Loading ...The ultimate financial crisis will be inflationary
“The ultimate financial crisis will have to be inflationary, because deflation scares provide ‘justification’ for central bank money-pumping and thus enable the long-term credit expansion to continue with only minor interruptions. To put it another way, a crisis won’t be system-threatening as long as it can be ameliorated by central banks doing what they do best, which is promote inflation.”
https://tsi-blog.com/2018/10/the-ultimate-financial-crisis-will-be-inflationary/
Makes sense. Thanks Curly
I believe the next crisis will come out of China, do not forget this is not a free market economy and facing any problems in China’s banking system will be resolved with unconventional methods. I do not think western economies are prepared for this.
“a crisis won’t be system-threatening as long as it can be ameliorated by central banks doing what they do best, which is promote inflation.” Yes. “as long as …”
Promoting inflation is what they WANT. In a measured way.
Ever encounter the term “pushing on a string” ? Ie, credit revulsion?
And what if the “Everything Bubble” cracks hard, rendering your PRIVATE banking system insolvent because their collateral begins to go poof? Thanks to their (reach for yield) leverage and unwillingness to allow even a modicum of Schumpeterian Creative Destruction now and then, to clear out the underbrush and reassert reality?
No. Its either hyperDEFLATION or hyperINFLATION ahead. The other doors are closed now.
Curly’s quote, which I tapped into above … comes from Steve Saville’s blog … which is must reading if you want to understand money.
“Since there is no limit to the amount of new money and credit that can be created out of nothing by the central bank, it will always be possible for the central bank to keep the current system going in the face of a crisis that involves a surge in the demand to hold the official money.” (but that’s only ONE case)
Two points … central banks can create high powered money de novo. But must that inevitably lead to expanded money supply (ie, account balances). In other words, can CB’s convince the non banking sector to borrow)? Open question, especially if debt repayment prospects dim. Second, are there circumstances that might cause the public to lose faith in fiat and turn elsewhere? Another open question, given interest in cryptos and alt monies. If systemic global finance problems are seen to be large enough, might faith in fiat suddenly evaporate given what the public assumes will be done (TARP times ??)? Any Americans that can do the math … are already waiting for that Wylie Coyote moment when everyone else “catches up” to them. Fundamentals are already driving dollar pessimism even while technicals (and yen, euro and yuan fears) are driving it higher for now. All fiat is suspect from here on out.
“The problem (for the monetary authorities) will occur when the crisis involves a plunge in the demand for the official money. In such a situation the central bank’s most powerful weapon becomes not just ineffective, but counter-productive*.”
The system runs on the TOTAL QUANTITY of credit, which grows if credit supply AND credit demand BOTH grow. Well, what if there is a plunge in (commercial) supply of credit? Eg, if SSFI’s stop cross lending? That’s what 2008 was about, in part. That’s Keynes’ Liquidity Trap too, where you can lead a horse to water (with low rates), but can’t make him drink.
If asset prices collapsed (of their own weight), leading to contracting economic activity and falling prices, REAL INTEREST RATES would BALLOON even if NOMINAL rates dropped to zero. Then you’d have perhaps contracting credit supply AND contracting credit demand, and the zero bound would leave central bankers FUBARED.
“If asset prices collapsed (of their own weight), leading to contracting economic activity and falling prices, REAL INTEREST RATES would BALLOON even if NOMINAL rates dropped to zero. Then you’d have perhaps contracting credit supply AND contracting credit demand, and the zero bound would leave central bankers FUBARED.”
To go far lower than zero, I suppose they could eliminate cash. And they would, if we let them.